In the restructured electric power market, electric power suppliers (e.g., power generators that do not sell some or all of their power directly to end-users or power re-marketers that do not resell some or all of their power) typically sell electric power to power purchasers pursuant to either “unit contingent” or “financially firm” power supply contracts. In the “unit contingent” contracts, the electric power supplier is typically not financially responsible to the purchaser if, for example, the equipment (e.g., generator(s) and/or transformer(s)) used for supplying power under the contract fail in whole or in part due to an unplanned event (e.g., an unplanned outage or derate of a unit). Thus, in the case of “unit contingent” contracts, the power purchaser typically must purchase replacement power in the open market at the time of the unplanned event. The cost of such power is unpredictable and extremely volatile. “Financially firm” power supply contacts are, in essence, the converse of “unit contingent” contracts. Such “financially firm” power supply contracts usually have liquidated damages provisions. Thus, in “financially firm” contracts, the electric power supplier is contractually obligated to deliver power to the purchaser and, thus, must purchase replacement power on the open market for the power purchaser in the case of an unplanned event that, for example, causes the equipment used for supplying power under the contract to fail in whole or in part. Thus, in “financially firm” contracts, the financial risks associated with purchasing replacement power are borne by the power supplier rather than by the power purchaser.
Both buyers and sellers of electric energy thus face significant financial risks in a restructured market. Such risks include power generation availability, transmission reliability, and financial performance of counter-parties or trading partners in a market in which prices are highly volatile. Volatility in energy prices results in higher budgets, reduced profitability and, ultimately, stock prices. Prior to the invention of the methods and systems defined herein, the only method for dealing with such risks were one-on-one counterparty deals and speculative financial instruments.
The present invention offers advantages over financial instruments and other prior art solutions. The present invention provides methods and systems of insuring risks with predictable pricing based on risk assessment, rather than market mechanisms; coverage for individual exposures; coverage for any amount, for any time period, and for particular risks identified by the insured, in short, complete flexibility in program design.
The present invention allows sellers of electric energy to market power to more customers and with greater confidence and allows buyers of electric energy to seek out alternative sources of power at different levels of firmness, obtain favorable terms and lock in savings.
As electric power restructuring progresses, power transactions are becoming a critical part of corporate business plans. Sellers with access to power must find new buyers. Buyers must achieve assured delivery at the lowest practical cost. Buyers must understand the force majeure/liquidated damage provisions in their contracts and realize that buying a fixed cost contract is not always the most effective solution to meeting their energy needs.
The methods and systems of the present invention combine custom tailored risk management solutions which are an innovative means of managing budgets, reducing costs and obtaining greater flexibility in the restructured electric power industry.